BAT fined for oversupplying tobacco in low-tax European jurisdictions

Big tobacco, long accused of complicity in smuggling, is under close scrutiny as it emerges that one of the world’s largest cigarette firms has been fined for oversupplying foreign markets.

The practice of flooding low-tax foreign markets with more tobacco than they are capable of consuming has sparked concerns that much of the product is able to find its way back into the highly taxed UK without HM Revenue and Customs receiving its due share. Anti-tobacco campaigners claim such abuse of the UK tax system is rife and believe that a fine imposed on British American Tobacco (BAT) is merely the tip of the iceberg.

BAT, a FTSE 100 company that last year sold 676bn cigarettes around the world, confirmed to the Observer that it had been fined £650,000 by HMRC, a decision that it pledged to appeal against, describing it as “unjustified” and “inappropriate”.

It is the first time HMRC has acted against a tobacco company in this manner. It refused to identify the company, citing “taxpayer confidentiality”, but in response to questions from this newspaper, BAT confirmed it was the firm recently fined for oversupplying UK-manufactured handrolling tobacco to Belgium. The

HMRC spokesman said it was now looking closely at the other major UK manufacturers to check whether they were acting illegally. “Sanctions are a last resort and applied only where there is evidence that a manufacturer is failing to comply with its legal obligations,” its spokesman said. “We have recently issued a penalty to one manufacturer and are keeping all UK manufacturers under review to ensure they comply with the rules.”

HMRC has long been criticised for failing to tackle tobacco smuggling. All the companies deny wrongdoing. But official reports have confirmed there has been a large oversupply of hand-rolling tobacco into the Benelux countries from the UK. The National Audit Office recently noted: “HMRC’s latest estimate, for 2011, is that the aggregate actual supply of some brands of hand-rolling tobacco to some countries exceeded legitimate demand by 240%.”

HMRC claims that its strategy for tackling tobacco smuggling has reduced the illicit cigarette market by half and the illicit hand-rolling tobacco market by a third. In 2013-14, it seized more than 1.4bn cigarettes and 330 tonnes of hand-rolling tobacco.

But health campaigners acknowledge HMRC faces an uphill task. “Tobacco manufacturers are spending millions lobbying against plain standard packaging, claiming that it will increase counterfeiting,” said Deborah Arnott, chief executive of Action on Smoking and Health. “The real problem is that the industry isn’t doing enough to prevent its own products being smuggled. Tobacco firms have fuelled smuggling on a massive scale by deliberately oversupplying foreign markets, knowing that their products will leak back into Britain.”

A spokesman for BAT said: “There are two types of people bringing tobacco products into the UK from overseas. Smugglers who want to make illegal profits; and genuine consumers exercising their right as EU citizens to buy any product for personal use in EU countries where the prices are cheaper than the UK.

“It is impossible for tobacco companies, which sell through retailers, to identify which shoppers are legitimate and which are intending to smuggle. After all, we are a business, not a law enforcement agency.”

Arnott said there were signs that the illicit trade in tobacco was starting to increase. “This fine is only the tip of the iceberg,” she said. “It raises questions about what else the industry is up to. A new government anti-tobacco smuggling strategy is due soon and it needs to make sure that the tobacco industry is obliged to put its house in order.”

The BAT spokesman said the company had invested significant resources over many years to tackle tobacco smuggling. “We will defend ourselves vigorously against the penalty and, as such, we are appealing what we believe to be an unjustified fine.”